An exemption reduces the amount of income that is subject to income tax. Previously common types included personal and dependent exemptions, but changes through the 2017 Tax Cuts and Jobs Act (TCJA) have modified how these work until the end of 2025. Dependent exemptions, among other types, still exist and can significantly impact your tax situation.
Key Takeaways
- An exemption reduces the taxable portion of income.
- Personal exemptions have been repealed and replaced by higher standard deductions until the end of 2025.
- Various other exemptions continue to exist in different forms.
- Certain income, such as earnings from municipal bonds, counts as exempted income.
Understanding How Exemptions Work
Before the TCJA, a personal exemption could be claimed alongside the standard deduction by taxpayers who did not itemize their deductions. The TCJA replaced these with higher standard deductions, yet exemptions still play a crucial role in reducing taxable income.
Personal Exemptions
While personal exemptions have been repealed as of 2017, the reform replaced them with significantly higher standard deductions for both couples and individuals. For the tax year 2022, the standard deduction is $12,950 for single filers, $19,400 for heads of household, and $25,900 for those married filing jointly. These amounts slightly increase in 2023.
Dependent Exemptions
Dependents typically include minor children but may also include other relatives, provided they meet specific IRS criteria. The Child Tax Credit was doubled to a maximum of $2,000 per child under the TCJA, with certain income thresholds affecting the actual credit received by families.
Exploring Other Types of Exemptions
Exemption from Withholding
Employees who have no tax liability may request an exemption from withholding. Although Medicare and Social Security taxes would still be withheld, income tax would not be deducted.
Income Exemptions
Certain types of income are wholly or partially exempt from taxes. Examples include municipal bond interest, gifts under defined limits, and qualified medical expenses distributions from health savings accounts (HSAs).
Common Questions on Exemptions
What Is a Qualified Dependent?
A dependent is usually someone who relies on another for financial support, such as a child or other relative. The IRS has specific rules for who qualifies as a dependent, and only one taxpayer can claim that dependent per tax return.
What Type of Income Is Tax-Exempt?
Income such as that from municipal bonds or qualified distributions from Roth accounts is typically tax-exempt. Distributions from HSAs for qualified medical expenses are also exempt from taxes.
How Much Is the Standard Deduction?
For the tax year 2022, the standard deduction is $12,950 for single filers and married individuals filing separately, and $25,900 for married couples filing jointly. These amounts will increase slightly in 2023.
By understanding and appropriately using exemptions, you can significantly reduce your taxable income and maximize your tax savings. Always consult a tax professional to explore your optimal tax scenario.
Related Terms: standard deduction, dependent exemption, taxable income, W-4 form, municipal bonds.
References
- Congress. “H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”.
- Internal Revenue Service. “Tax-Exempt Governmental Bonds”, Page 2.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023”.
- Internal Revenue Service. “Publication 501: Exemptions, Standard Deduction, and Filing Information”, Pages 11-12, 23.
- Internal Revenue Service. “Publication 501: Exemptions, Standard Deduction, and Filing Information”, Page 11.
- Internal Revenue Service. “Publication 501: Exemptions, Standard Deduction, and Filing Information”, Pages 13-22.
- Internal Revenue Service. “Topic No. 753 Form W-4 – Employee’s Withholding Certificate”.
- Internal Revenue Service. “Publication 969 (2021), Health Savings Accounts and Other Tax-Favored Health Plans”.
- Internal Revenue Service. “About Form W-4, Employee’s Withholding Certificate”.
- Internal Revenue Service. “Dependents”, Page 6-5.
- Internal Revenue Service. “Roth Comparison Chart”.
